If You Lease Assets, You Are Affected

If you currently (or plan to) lease assets such as real estate, airplanes, automobiles, and construction and manufacturing equipment, yes, Accounting Standards Codification 842 will impact the way you account for your leases. If your organization is the holder of a lease asset, you are considered a lessee. As such, you will be required to recognize the assets and liabilities for leases with terms greater than 12 months and the rights and obligations created by those leases on the balance sheet.

A Lease Or Not A Lease?

To qualify as a lease under the new standard:

• It must be a physical asset.
• You must have the right to control or use the asset.
• The asset must be explicitly or implicitly identified.

Examples include (but are not exclusive to) office rental, photocopiers, computers and servers, vehicles, and equipment. Examples of what is typically not considered a lease under this new standard are software subscriptions, leases for intangible assets, leases for exploration or use of non-renewable resources, and leases of inventory or assets under construction.

Some judgment will be necessary for analyzing existing leases and implementing the new standard. The good news of a judgment-based standard is that the facts behind your contracts drive the numbers on your financial statements, rather than implementing hardline accounting rules that may not apply to every circumstance.

Keep in mind that this analysis and interpretation increase the time it will take to implement the new standard -which is why you should act now.

There Will Be Much To Consider Moving Forward

As you'd expect, implementing the new lease standard means you will change how you think about and account for individual leases. There are a few additional considerations to keep in mind as well.

Debt Covenants

Changing accounting methods doesn't change your organization, but it can affect the way your financial results are viewed by outside parties. In particular, adding significant lease liabilities can impact your compliance with debt covenants. It's critical that you get a handle on the potential impact and start conversations with your bank as early as possible.

Policy Elections

The new lease standard requires organizations to make policy decisions about how they will handle leases. Many of these policies make implementation easier but often will result in a larger asset and liability on the books. Early on, your organization needs to review and decide on the policies that are right for you.

Process & Controls

In most organizations, operating lease decisions are fairly decentralized, especially when multiple locations are involved. The new lease standard requires these decisions to be documented and available for accounting, which introduces a need for new systems, processes, and controls. The good news is that organizations are often finding efficiencies and cost savings with this new approach.